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Tue, 31 Mar 2015 15:15:58 +0200Tue, 31 Mar 2015 15:15:58 +0200Too interconnected to fail: a survey of the interbank networks literaturehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37186
The banking system is highly interconnected and these connections can be conveniently represented as an interbank network. This survey presents a systematic overview of the recent advances in the theoretical literature on interbank networks. We assess our current understanding of the structure of interbank networks, of how network characteristics affect contagion in the banking system and of how banks form connections when faced with the possibility of contagion and systemic risk. In particular, we highlight how the theoretical literature on interbank networks offers a coherent way of studying interconnections, contagion processes and systemic risk, while emphasizing at the same time the challenges that must be addressed before general results on the link between the structure of the interbank network and financial stability can be established. The survey concludes with a discussion of the policy relevance of interbank network models with a special focus on macroprudential policies and monetary policy.Anne-Caroline Hüserworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37186Tue, 31 Mar 2015 15:15:58 +0200The economic crisis and medical care usagehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36854
We use a unique, nationally representative cross-national dataset to document the reduction in individuals’ usage of routine non-emergency medical care in the midst of the economic crisis. A substantially larger fraction of Americans have reduced medical care than have individuals in Great Britain, Canada, France, and Germany, all countries with universal health care systems. At the national level, reductions in medical care are related to the degree to which individuals must pay for it, and within countries are strongly associated with exogenous shocks to wealth and employment.Annamaria Lusardi; Daniel Schneider; Peter Tufanoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36854Fri, 06 Feb 2015 11:30:42 +0100The limits of model-based regulationhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36135
In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions. Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation.Markus Behn; Rainer Haselmann; Vikrant Vigworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36135Wed, 17 Dec 2014 09:57:53 +0100Systemic risk and sovereign debt in the euro areahttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34809
We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability.Radev Deyanreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34809Tue, 25 Nov 2014 15:58:48 +0100News media sentiment and investor behaviorhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35580
This paper investigates the impact of news media sentiment on financial market returns and volatility in the long-term. We hypothesize that the way the media formulate and present news to the public produces different perceptions and, thus, incurs different investor behavior. To analyze such framing effects we distinguish between optimistic and pessimistic news frames. We construct a monthly media sentiment indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and/or the lead paragraph. Our results indicate that pessimistic news media sentiment is positively related to global market volatility and negatively related to global market returns 12 to 24 months in advance. We show that our media sentiment indicator reflects very well the financial market crises and pricing bubbles over the past 20 years.
Roman Kräussl; Elizaveta Mirgorodskayaworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35580Tue, 25 Nov 2014 12:15:59 +0100The broken buck stops here: embracing sponsor support in money market fund reformhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35574
Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis because widespread redemption demands during the days following the Lehman bankruptcy contributed to a freeze in the credit markets. In response, MMFs were deemed a component of the nefarious shadow banking industry and targeted for regulatory reform. The Securities and Exchange Commission’s (SEC) misguided 2014 reforms responded by potentially exacerbating MMF fragility while potentially crippling large segments of the MMF industry.
Determining the appropriate approach to MMF reform has been difficult. Banks regulators supported requiring MMFs to trade at a floating net asset value (NAV) rather than a stable $1 share price. By definition, a floating NAV prevents MMFs from breaking the buck but is unlikely to eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, the SEC’s reforms may substantially reduce the utility of MMFs for many investors, which could, in turn, affect the availability of short term credit.
The shape of MMF reform has been influenced by a turf war among regulators as the SEC has battled with bank regulators both about the need for additional reforms and about the structure and timing of those reforms. Bank regulators have been influential in shaping the terms of the debate by using banking rhetoric to frame the narrative of MMF fragility. This rhetoric masks a critical difference between banks and MMFs – asset segregation. Unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. This difference has caused the SEC to mistake sponsor support as a weakness rather than a key stability-enhancing feature. As a result, the SEC mistakenly adopted reforms that burden sponsor support instead of encouraging it.
As this article explains, required sponsor support offers a novel and simple regulatory solution to MMF fragility. Accordingly this article proposes that the SEC require MMF sponsors explicitly to guarantee the $1 share price. Taking sponsor support out of the shadows embraces rather than ignores the advantage that MMFs offer over banks through asset partitioning. At the same time, sponsor support harnesses market discipline as a constraint against MMF risk-taking and moral hazard.Jill E. Fischworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35574Tue, 25 Nov 2014 12:07:53 +0100The dynamics of crises and the equity premiumhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34324
There has been a considerable debate about whether disaster models can rationalize the equity premium puzzle. This is because empirically disasters are not single extreme events, but long-lasting periods in which moderate negative consumption growth realizations cluster. Our paper proposes a novel way to explain this stylized fact. By allowing for consumption drops that can spark an economic crisis, we introduce a new economic channel that combines long-run and short-run risk. First, we document that our model can match consumption data of several countries. Second, it generates a large equity risk premium even if consumption drops are of moderate size.Nicole Branger; Holger Kraft; Christoph Meinerdingworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34324Wed, 12 Nov 2014 08:38:48 +0100Equilibrium asset pricing in networks with mutually exciting jumpshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33317
We analyze the implications of the structure of a network for asset prices in a general equilibrium model. Networks are represented via self- and mutually exciting jump processes, and the representative agent has Epstein-Zin preferences. Our approach provides a exible and tractable unifying foundation for asset pricing in networks. The model endogenously generates results in accordance with, e.g., the robust-yetfragile feature of financial networks shown in Acemoglu, Ozdaglar, and Tahbaz-Salehi (2014) and the positive centrality premium documented in Ahern (2013). We also show that models with simpler preference assumptions cannot generate all these findings simultaneously.Nicole Branger; Patrick Konermann; Christoph Meinerding; Christian Schlagworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33317Tue, 11 Nov 2014 17:12:28 +0100Assessing systemic fragility – a probabilistic perspectivehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35002
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.Deyan Radevreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35002Mon, 03 Nov 2014 16:52:47 +0100Assessing systemic fragility – a probabilistic perspectivehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35014
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.Deyan Radevworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35014Mon, 03 Nov 2014 16:47:33 +0100Lessons from the european financial crisishttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35309
his paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks’ sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area “banking union” can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks’ risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks’ capital shortfall, such as book and market leverage ratios.Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35309Mon, 03 Nov 2014 16:24:36 +0100Dealing with financial crises: how much help from research?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35123
Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35123Mon, 20 Oct 2014 15:50:46 +0200Systemic risk spillovers in the European banking and sovereign network : [Version September 10, 2014]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35086
We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis and how it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started.Frank Betz; Nikolaus Hautsch; Tuomas A. Peltonen; Melanie Schienleworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35086Mon, 20 Oct 2014 13:02:32 +0200The limits of model-based regulationhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34995
In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions. Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation.Markus Behn; Rainer Haselmann; Vikrant Vigworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34995Fri, 19 Sep 2014 15:00:48 +0200Systemic risk in the financial sector: what can we learn from option markets? : [version 10 february 2014]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35010
We propose a novel approach on how to estimate systemic risk and identify its key determinants. For US financial companies with publicly traded equity options, we extract option-implied value-at-risks and measure the spillover effects between individual company value-at-risks and the option-implied value-at-risk of a financial index. First, we study the spillover effect of increasing company risks on the financial sector. Second, we analyze which companies are mostly affected if the tail risk of the financial sector increases. Key metrics such as size, leverage, market-to-book ratio and earnings have a significant influence on the systemic risk profiles of financial institutions.Holger Kraft; Alexander Schmidtreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35010Mon, 08 Sep 2014 13:19:44 +0200Pricing two trees when mildew infests the orchard: how does contagion affect general equilibrium asset prices : [version: March 11, 2011)http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34701
This paper analyzes the equilibrium pricing implications of contagion risk in a two-tree Lucas economy with CRRA preferences. The dividends of both trees are subject to downward jumps. Some of these jumps are contagious and increase the risk of subsequent jumps in both trees for some time interval. We show that contagion risk leads to large price-dividend ratios for small assets, a joint movement of prices in the case of a regime change from the calm to the contagion state, significantly positive correlations between assets, and large positive betas for small assets. Whereas disparities between the assets with respect to their propensity to trigger contagion barely matter for pricing, the prices of robust assets that are hardly affected by contagion and excitable assets that are severely hit by contagion differ significantly. Both in absolute terms and relatively to the market, the price of a small safe haven increases if the economy reaches the contagion state. On the contrary, the price of a small, contagion-sensitive asset exhibits a pronounced downward jump.Nicole Branger; Holger Kraft; Christoph Meinerdingreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34701Tue, 12 Aug 2014 15:46:21 +0200Interbank network and bank bailouts: insurance mechanism for non-insured creditors : [Version 10 April 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34786
This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis. Tim Eisert; Christian Eufingerreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34786Tue, 12 Aug 2014 15:32:38 +0200Everything you always wanted to know about systemic importance (but were afraid to ask)http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34745
We develop a methodology to identify and rank “systemically important financial institutions” (SIFIs). Our approach is consistent with that followed by the Financial Stability Board (FSB) but, unlike the latter, it is free of judgment and it is based entirely on publicly available data, thus filling the gap between the official views of the regulator and those that market participants can form with their own information set. We apply the methodology to annual data on three samples of banks (global, EU and euro area) for the years 2007-2012. We examine the evolution of the SIFIs over time and document the shifs in the relative weights of the major geographic areas. We also discuss the implication of the 2013 update of the identification methodology proposed by the FSB.Piergiorgio Alessandri; Sergio Masciantonio; Andrea Zaghiniworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34745Tue, 29 Jul 2014 17:56:14 +0200Exit strategieshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34178
We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate - based on output and inflation performance and bank stability - alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist, but are more nuanced.Ignazio Angeloni; Ester Faia; Roland Winklerworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34178Tue, 17 Jun 2014 15:40:17 +0200Systemic risk in an interconnected banking system with endogenous asset
markets : [version 30 march 2014]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33829
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.Marcel Bluhm; Jan Pieter Krahnenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33829Fri, 30 May 2014 10:54:25 +0200Monetary policy implementation in an interbank network: effects on systemic risk : [version 26 march 2014]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33827
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.Marcel Bluhm; Ester Faia; Jan Pieter Krahnenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33827Fri, 30 May 2014 10:41:12 +0200Bank bonds: size, systemic relevance and the sovereign : [Version April 2014]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33831
We analyze the risk premium on bank bonds at origination with a special focus on the role of implicit and explicit public guarantees and the systemic relevance of the issuing institutions. By looking at the asset swap spread on 5,500 bonds, we find that explicit guarantees and sovereign creditworthiness have a substantial effect on the risk premium. In addition, while large institutions still enjoy lower issuance costs linked to the TBTF framework, we find evidence of enhanced market disciple for systemically important banks which face, since the onset of the financial crisis, an increased premium on bond placements.Andrea Zaghiniworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33831Wed, 28 May 2014 17:03:28 +0200Banks' financial distress, lending supply and consumption expenditure : [version december 2013]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33149
The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment, where even temporary adverse credit supply shocks are associated with significant real effects.H. Evren Damar; Reint Gropp; Adi Mordel workingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33149Mon, 03 Mar 2014 09:32:54 +0100Systemic risk and sovereign debt in the euro area : [version 13 december 2013]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33147
We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability.Deyan Radevworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33147Mon, 03 Mar 2014 08:32:42 +0100Financial network systemic risk contributionshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32497
We propose the realized systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market as well as balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential supervision.Nikolaus Hautsch; Julia Schaumburg; Melanie Schienleworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/32497Mon, 16 Dec 2013 09:12:18 +0100